Ever since listing, there were doubts on the valuation that Robinhood (NASDAQ:HOOD) stock commanded. After an initial spike, HOOD stock has remained in a downtrend. Several factors have contributed to the massive selling in the last six-months with the stock plunging by 75% during this period. I must admit that I didn’t expect HOOD stock to trade below $10 levels.
After the massive correction, I would not rule-out some trading bounce-back for the stock. It might however be still too early to believe that the stock can continue to trend higher.
In my view, Robinhood stock can be considered for fresh exposure if there is a potential recession in the U.S. in 2023 or earlier.
This might sound strange. Let me explain the reason later in the discussion.
Reasons For HOOD Stock Plunge
It’s important to understand why the markets punished Robinhood. Of course, an obvious factor is that the listing and the subsequent spike meant that the stock is richly valued. Even considering the growth outlook.
A more important reason is the fact that Robinhood’s growth largely depends on the level of speculative activity in equities and cryptocurrencies. This is clearly evident from the fact that the company’s growth spiked in the meme stock frenzy. Additionally, when trading in meme coins increased, Robinhood reported sharp growth in revenue from the cryptocurrency segment.
It’s no secret that sentiments have completely reversed. With the Federal Reserve focused on curbing inflation, rate hikes are likely to be aggressive. The central bank recently increased fed fund rates by 50 basis points. This implies liquidity tightening in the global financial system, a point that’s clearly indicated by the strength in the dollar index.
The implication is that there is less speculative money in the financial system. The next one or two quarters are likely to be the worst for Robinhood in terms of revenue and profitability. HOOD stock has been discounting that factor.
Weak Growth Metrics
It’s worth noting that in Q4 2020, Robinhood reported net cumulative funded accounts of 12.5 million. The number of accounts surged to 22.7 million a year later. This was the best growth phase for the company. However, for Q1 2022, the net cumulative funded accounts were 22.8 million. Also, there has been a steady decline in monthly active users and ARPU since Q1 2021.
So, why can a potential recession reverse the downtrend in key growth metrics?
I believe that contractionary monetary policies are unlikely to sustain. Investors are predicting a recession in the U.S in 2023. It’s also being forecasted that U.K. will enter into recession later this year. Cathie Wood also talked about the possibility of a global recession.
The Federal Reserve is likely to be less aggressive in terms of rate hikes in the next few quarters. I also believe that policies can reverse to expansionary if there is a recession. Risky asset classes will get back the liquidity glut that’s currently missing. Speculative activity will be back in the markets and that will be good news for Robinhood.
For now, HOOD stock is an attractive short-term trading bet. However, I would refrain from taking any big positions.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.